E Focus Stock Picks: Choice Hotels (CHH) & Zimmer Holdings (ZMH)

Choice Hotels Int'l (CHH)
 
In the 3-months ending April, CHH has posted gains in 8 of the past 10 years, generating a 7.12% average return and a 6.8% median return. CHH's standard deviation is 8.77% in the period and its correlation to the SPY is 0.03.
 



Choice is the 2nd largest hotelier in terms of number of hotels in the U.S., where 79% of its rooms are located (426k rooms open or under development).  9% of its hotels are in Europe (47k rooms open or under development), 5% in Canada, and 4.4% in Asia Pacific.  45% of its hotels are upper midscale, 32% are midscale and 18% are economy.  The company franchises lodging properties under its proprietary brand names comprising Comfort Inn, Comfort Suites, Quality, Clarion, Ascend Collection, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, and Cambria Suites. As of January 29, 2014, it franchises ~6,300 hotels  (up 1.7% YoY) consisting of ~503k rooms (up 1.2% YoY) in the U.S., as well as 30 other countries and territories. As of September 30, 2013, 371 hotels, representing more than 29,000 rooms, were under construction, awaiting conversion or approved for development in the United States. Additionally, 84 hotels, representing approximately 7,200 rooms, were under construction, awaiting conversion or approved for development in more than 15 other countries and territories. 

Choice opened 107 properties worldwide and signed 129 new domestic franchise agreements in Q3, 45% more than were signed in Q3, 2012.  In the third quarter, franchise revenue grew 6% to $95.5 million.  Domestic RevPAR expanded 3% to $52.63 (RevPAR was $35.18 in 2009), thanks to occupancy growth of 70 bps and rate growth of 1.9%.  Avg. daily room rate was $80.14 in the third quarter, lifting nine month ADR to $75.1.  For comparison, ADR in the year ago quarter was $78.6.  Occupancy was 65.7%, up 70 bps YoY (Occupancy was below 50% on 487k rooms in 2009).  Domestic royalty fees grew 3% to $76.7 million.  Overall, total revenue was up 6% to $223 million in Q3, bringing sales through the first nine months to $543.6 million, also up 6% (sales are up 14% since Q2 2011). The number of worldwide hotels under construction, awaiting conversion or approved for development as of September 30, 2013 was 455 hotels representing 37,077 rooms, an increase of 4.6% and 2.6%, respectively, from September 30, 2012. Since its stock repurchase program began in 1998, the company has repurchased 45.3 million shares of its common stock for a total cost of $1.1 billion. In the 12 month period ending September, the company's net debt fell from $721 million to $664 million.  Cash stood at $161 million exiting the third quarter, up from $134 million a year ago. 

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